5 reasons to refinance your home loan now

With competition continuing to flare up in the Australian home loan market, homeowners looking to switch over to a better deal are in for a nice surprise. 

The latest edition of our Mozo Banking Roundup has revealed June was another busy month of home loan lenders slashing their fixed and variable rates, with new leaders for both categories emerging just in the last couple of weeks. 

So, with record low interest rates on offer across Australia right now, refinancing could be a great way to give yourself an instant pay raise. 

And it seems many Aussies are already taking advantage of this opportunity to save big bucks. Australian Bureau of Statistics (ABS) data shows that in April this year, a record $7.9 billion owner-occupier home loans were refinanced, up 50% from last year. 

But of course, every homeowner’s situation differs, so you may be wondering whether refinancing is the right path for you. Here are a few reasons why you might consider this option.

Your fixed rate home loan will revert soon

One common trap that homeowners with fixed rate home loans fall into is that they forget about the revert rate. This is the rate that automatically kicks in once your fixed term ends, and it could go as high as over double the rate you signed up for.

While you might avoid the revert rate by switching over to another loan offered by the same lender, there’s always a chance you may be unhappy with their new offer. 

That’s when refinancing comes in. 

This option allows you to shop around and take your pick from a bigger bunch. Although refinancing involves a bit more paperwork and some fees, it can be an effective way to dodge a nasty hike in monthly repayments, and keep your costs down in the long run. 

You want to be mortgage free sooner

For some homeowners, refinancing is an opportunity to pay off their mortgage faster. By hopping onto a lower rate while maintaining your existing monthly repayments, you can shave years off your loan term. 

The sooner you get out of debt, the less interest you’ll have to pay over the life of the loan.

Let’s say you borrowed $700,000 over 25 years, and you’re currently signed up to the average big 4 variable rate of 3.94%.^ If you were to refinance to the lowest rate in the Mozo database of 2.19% (at the time of writing) but maintain the same monthly repayments of $3,672, then you could potentially be mortgage free 5 years and 5 months earlier and save about $240,431 in total interest. 

Just bear in mind that some lenders may penalise you for paying off your home loan early, so watch out for the early repayment fee when choosing which deal you want to refinance to.

You want a loan with more/less bells and whistles

In the years since you took out your home loan, your circumstances may have changed. Say you started off with a ‘no frills’ option, but a recent job promotion means you now have more disposable income, so you want an option that lets you make extra repayments and access a redraw facility. 

By refinancing to a home loan with more features, you can enjoy a level of flexibility that you didn’t have before. 

However, the more added features a home loan has, the more fees and interest it may charge. So if, on the flipside, you find that you no longer need all the bells and whistles, you could also look to refinance to a more basic loan. 

You want to tap into home equity 

Got a major expense like a home renovation or a medical procedure to cover, but running a little short on cash? For some homeowners, refinancing is a way to access additional funds by way of home equity - that is, the percentage of your property’s market value that belongs to you (not your lender). 

Let’s say your property is worth $700,000 but you still owe the bank $400,000. That means you have equity of $300,000 - or a loan-to-value (LVR) ratio of 57%. So if you refinance to another loan with an 80% maximum LVR, then you’d only need $140,000 (or 20% of $700,000) in home equity to secure the deal. That means your new lender could theoretically release up to $160,000 in leftover equity.  

Just be aware that this method would rewind a lot of your efforts: it would expand the size of your mortgage, so your repayments get bigger and you also add years onto your loan term. So if accessing equity is your reason for refinancing, double check that it’s within your means and you aren’t just magnifying your debt pile. 

You just want better bang for your buck

With current affairs leaving many Aussies worried about their finances, it’s possible we’re all looking for ways to save and grow our emergency cash stash. While fewer online shopping sprees or a smaller energy bill can help to relieve pressure on your budget, the real money makers come from things like your home loan. 

After all, even if your home loan was once the cheapest on the market, that’s likely no longer the case, especially given the steep falls in rates after the five Reserve Bank (RBA) cuts since June last year. 

So to ensure you’re still getting a competitive deal, refinancing to secure a lower rate could be a good option. Chances are, it’ll not only reduce your total interest costs but also slash your monthly repayments by hundreds of dollars. 

So how much can I actually save on monthly repayments by refinancing?

Let’s do the maths.

As of June 2020, the average variable home loan rate for owner occupiers sits at 3.43% p.a., according to Mozo’s home loan statistics. But if you went back to June 2017, you’d be looking at a much higher 4.44% p.a. average. 

That’s a massive 101 basis point difference. This means that just by refinancing to today’s average variable rate rather than sticking with the average rate from three years ago, you could save about $268 in monthly repayments on a $500,000 loan.^^ Over one year, that’s $3,216 extra you get to keep in your hip pocket. 

And that calculation above isn’t even accounting for the range of lenders who have far better rates than the average. Reduce Home Loans, for instance, currently offers the lowest variable rate in our database of just 2.19% (2.19% comparison rate*), available on its Super Saver Variable home loan.

To see how much you could save by refinancing, check out our Home Loans Switch & Save calculator. Or for a list of refinance deals, scroll down below to get started today!

^Mozo data, as of 6 July 2020.

^^Mozo calculations, as of 2 July 2020.